Positive all around. Good commentary on capital, timing, ending the NWS, and making the lawsuits go away. Pinch me.

Fannie, Freddie need strong capital position to exit conservatorship: FHFA chiefBy Hannah LangPublished May 14 2019, 4:01pm EDT— In his first public policy discussion as director of the Federal Housing Finance Agency, Mark Calabria stressed that a strong capital position will determine the future for Fannie Mae and Freddie Mac, eventually helping to lead them out of conservatorship.

The lack of capital at Fannie and Freddie spurred the government to seize control of the government-sponsored enterprises more than a decade ago, so the two will have to build a sufficient amount in order to release themselves, Calabria said Tuesday at a National Association of Realtors legislative conference.

“All large, systemically important financial institutions should be well capitalized,” he said, speaking at a regulatory forum with Vanity Fair’s Bethany McLean. “That should seem non-debatable at this point. I think if your objective is not to put the taxpayer at risk, if the taxpayer is at risk, the system is at risk.”

“If you don’t have a lot of capital, you can’t take a lot of risk, and that’s a very basic notion that I think is a responsible way to run two companies," said FHFA Director Mark Calabria.Bloomberg News

Calabria reiterated his timeline for the first steps toward their release this year, which he said would be negotiating changes to the preferred stock purchase agreements with the Treasury Department in the fall, after Treasury and the Department of Housing and Urban Development put out reports on administrative and legislative reform in response to a recent presidential directive.

Treasury has consulted with the FHFA on its response, said Calabria, and after those reports are finalized, he plans to work toward ending the “net worth sweep.” In 2012, the FHFA and Treasury altered the senior agreements to require Fannie and Freddie to deliver nearly all of their profits to the Treasury Department in an effort to repay taxpayers, leaving the GSEs with an incredibly small capital cushion of $3 billion each.

“I will engage with Treasury on an equal basis to where we can make changes to the share agreement that would create a path to get out of conservatorship, and that would absolutely require an end to the sweep,” he said. “My hope is we can have this wrapped up where we set a road map … out of conservatorship somewhere later in the year.”

But simply allowing the GSEs to retain earnings wouldn’t provide enough capital to safely release Fannie and Freddie from conservatorship, and FHFA will begin to look over data related to a public offering later this year, though the timeline is “not calendar dependent,” said Calabria.

“The best thing that can be done for the markets is to create a transparent system where the financials are understandable, they actually translate what the business model is and profitability is, and then investors can decide for themselves whether they want to invest in it,” he said.

“How do we level the playing field to where all large financial institutions have similar capital so that the GSEs have a successful business model because they have good management, because they have good execution, not because they have lower standards than everybody else?” he said.

Stronger capital will also counteract the GSEs’ procyclical tendencies that were present in the run-up to the financial crisis, said Calabria.

“Not having enough capital will mean that Fannie and Freddie will pull back,” he said. “If they have sufficient capital, they will keep lending throughout the crisis and we will have mortgage availability through a downturn, which is when we need it most.”

Before Fannie and Freddie are released from conservatorship, they will also need to have a strong supervisory framework in place, he said.

“I have an agency where almost the entire existence of the agency Fannie and Freddie have been in conservatorship,” he said. “If you really think about it you’re going to be carrying a lot of the weight, moving it from the conservator to the supervision team. I haven’t seen anything to raise any questions in my mind, but for me, a prerequisite to leave conservatorship is I’ve got 100% confidence that the supervisory framework is there.”

Meanwhile, Fannie and Freddie will likely curtail risk while they maintain a limited capital buffer in conservatorship, said Calabria.

“If you’ve got more capital, you can take more risk,” he said. “If you don’t have a lot of capital, you can’t take a lot of risk, and that’s a very basic notion that I think is a responsible way to run two companies.”

The combinations of risk factors in a loan, he said, will have to be “looked at holistically.”

“What we can do is dial this back a little bit, hardly noticeable at all in the marketplace," Calabria said. "The vast majority of loans will stay where they are, but we can dial back the riskiest part of it and again reduce a lot of the risk that way."

However, Calabria echoed his testimony at a Senate Banking Committee nomination hearing in February, reiterating that loan limits, affordable housing goals and the “duty-to-serve” provisions will stay in place.

McLean also asked Calabria about continuing shareholder litigation, which he brushed off.

“I think if we can chart a path out of conservatorship … that that makes a lot of those issues go away,” he said.

“I will engage with Treasury on an equal basis to where we can make changes to the share agreement that would create a path to get out of conservatorship, and that would absolutely require an end to the sweep,” he said. “My hope is we can have this wrapped up where we set a road map … out of conservatorship somewhere later in the year.”

“I think if we can chart a path out of conservatorship … that that makes a lot of those issues go away,” he said.

“I really would like to see Congress act,” he said. “Keep in mind, I’ve got two entities, I’ve got the current business model — I’m stuck with that. I can get them out of conservatorship, I can try to make sure they’re better capitalized, better regulated, but essentially, the model is the model.

I think regarding the prefs this statement is accurate. But perhaps not so much with the common. Long-term, after dilution, I will strongly consider buying common but to me that is a better bet once the companies are operating normally again, with the prefs being a better bet now.

I've noticed as well that Calabria's timeline indicates a capital raise about a year from today in first half of next year. This ties in with the moelis plan of announcing the companies will be released and then raising capital.

Also, assuming the government exercise the warrants they're then incentived to limit dilution to maximise their gains.

Also, assuming the government exercise the warrants they're then incentived to limit dilution to maximise their gains.

I would be very careful here. Treasury didn't always act in such a way as to maximize the value of its common shares with regards to the other bailout recipients. Also, they could sell the warrants back to FnF for a set amount of money, removing Treasury's incentive to prop up the share price.

There's also the matter that the investors that will recap FnF have a powerful incentive to drive the share price down as far as possible, and Treasury can't afford to just tell them no.

I believe this is why the common price is staying mostly flat, even with all this good news. It will be very sensitive to small changes in the mechanics of the recap.

Also, assuming the government exercise the warrants they're then incentived to limit dilution to maximise their gains.

I would be very careful here. Treasury didn't always act in such a way as to maximize the value of its common shares with regards to the other bailout recipients. Also, they could sell the warrants back to FnF for a set amount of money, removing Treasury's incentive to prop up the share price.

There's also the matter that the investors that will recap FnF have a powerful incentive to drive the share price down as far as possible, and Treasury can't afford to just tell them no.

I believe this is why the common price is staying mostly flat, even with all this good news. It will be very sensitive to small changes in the mechanics of the recap.

If Fannie has a market cap of 165b and common is diluted 92% they're still worth $9.

If the company and Treasury are sensible with the capital raise then the company can push back to investors that actually they don't need to raise cash they could just earn their way out of it. I'd prefer that but I don't expect it as treasury will likely want it's cash asap.

you can go around and around on common valuation and not know where you end up until you see some kind of deal structure announced...and then it might still change once that deal goes to market. the interesting thing is that treasury has such a good deal, 80% free warrants, that you would think it would give some up in order to ensure deal execution. may be wishful thinking though

Sherrod Brown's favoring a status quo could mean anything from liking the current conservatorship scheme (nationalization) to simply keeping Fannie and Freddie *as is*. While it is highly unlikely Congress may succeed at tying FHFA/Tsy's hands even if they try, it is not inconceivable that they may take a shot at it. The more Calabria talks...

Sherrod Brown's favoring a status quo could mean anything from liking the current conservatorship scheme (nationalization) to simply keeping Fannie and Freddie *as is*. While it is highly unlikely Congress may succeed at tying FHFA/Tsy's hands even if they try, it is not inconceivable that they may take a shot at it. The more Calabria talks...

We need a material move, less explaining.

At my new job, I was given the advice of building consensus and getting an idea approved BEFORE the formal meeting in which you seek it's approval and build the case for it.

Seems to me that's what's happening here. Informing the audience, building a consensus, and seeking approval BEFORE taking the official actions.

Certainly could be wrong, but I'm not concerned by the recent rise in optics on the situation.